- August 06, 2020
- Lisa Varela
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IRS Amends 199A Regs on Suspended Losses and RICs
The IRS amended final regulations with guidance on the Code Sec. 199A deduction for suspended losses and shareholders of regulated investment companies (RICs). The amendments address the treatment of suspended losses included in qualified business income (QBI), the deduction allowed to a shareholder in a regulated investment company (RIC), and additional rules related to trusts and estates. The IRS had previously issued final and proposed regulations addressing these issues ( NPRM REG-134652-18)
Background
Code Sec. 199A provides a deduction of
up to 20 percent of qualified business income (QBI) from a U.S. trade
or business operated as a sole proprietorship, or through a partnership,
S corporation, trust, or estate. If the taxpayer’s taxable income
exceeds the threshold amount in Code Sec. 199A(e)(2), the deduction may
be limited. Statutory limitations are subject to phase-in rules. Code
Sec. 199A also provides individuals and some trusts and estates a
deduction of up to 20 percent of their combined qualified real estate
investment trust (REIT) dividends and qualified publicly traded
partnership (PTP) income.
461(l) Losses
Under Reg. §1.199A-3(b)(1)(iv),
previously disallowed losses or deductions allowed in the tax year are
generally taken into account for computing QBI, except to the extent the
losses or deductions were disallowed, suspended, limited, or carried
over from tax years ending before January 1, 2018. The final regulations
amend Reg. §1.199A-3(b)(1)(iv)(A) to specifically reference excess
business losses disallowed by Code Sec. 461(l) and treated as a net
operating loss (NOL) carryover for the tax year for purposes of
determining any NOL carryover in subsequent tax years. The IRS notes
that the list of statutes in the regulation is not exhaustive
Phase-in Rules for SSTB Losses
The amendments
also clarify how the phase-in rules apply when a taxpayer has a
suspended or disallowed loss or deduction from a specified service trade
or business (SSTB). If the individual’s taxable income is at or below
the threshold amount in the year the loss or deduction is incurred, the
entire disallowed loss or deduction is treated as QBI from a separate
trade or business in the later tax year in which the loss is allowed. If
the individual’s taxable income is within the phase-in range, only a
percentage of the disallowed loss or deduction is taken into account in
the later tax year. If the individual’s taxable income exceeds the
phase-in range, the loss or deduction is not included in QBI.
Conduit Treatment
The final regulations provide
conduit treatment for qualified REIT dividends earned by a RIC. Conduit
treatment happens when a RIC treats dividends paid to a shareholder in
the same or similar manner as the shareholder would treat the underlying
item of income or gain if the shareholder realized it directly. The
Treasury Department and IRS continue to consider comments on whether to
provide conduit treatment for qualified PTP income, and for RIC income
from an activity that would generate QBI if conducted by a partnership
or an S corporation.
Separate Share Rule
The separate share applies
for a trust or estate described in Code Sec. 663(c) with substantially
separate and independent shares for multiple beneficiaries. Under the
final regulations, the trust or estate will be treated as a single trust
or estate for determining taxable income, net capital gain, net QBI,
W-2 wages, unadjusted basis immediately after acquisition (UBIA) of
qualified property, qualified REIT dividends, and qualified PTP income
for each trade or business of the trust or estate, and for computing the
W-2 wage and UBIA of qualified property limitations.
Applicability
The amended regulations apply to
tax years beginning 60 days after publication in the Federal Register.
However, taxpayers may choose to apply the amendments before that date.
Taxpayers who chose to rely on the proposed regulations issued in
February 2019 may continue to do so until the date these amendments are
published.